Saving is an essential habit for every family. But where you put what you saved is an equally important matter. Based on a report, at least 50% of adults have bank accounts. That means roughly 50% still keep their money in unproductive locations such as safety vaults, cabinets, or under their beds.
In this post I will present to why it is imperative to keep your family’s savings in digital banks.
Summary
A regular savings account doesn’t protect our money from inflation. The interest rates they offer aren’t high enough to beat the rising cost of goods and services each year. Digital banks, on the other hand, offer rates that are beyond the inflation rate. It not only helps us preserve our money, it also makes a small profit.
Digital Banks Give High Interest Rates
The biggest reason why you would want to keep your savings in digital banks is its interest rate. They offer interest rates that are 50 times higher than regular savings accounts, 7 times higher than high-yield accounts, and 3 times higher than time deposit accounts.
| Digital Banks | Traditional Banks | |
|---|---|---|
| Savings | 3.5% | 0.0675% |
| High-yield | 3.5% | .50% |
| Time deposit | 3.5% | 1% |
Digital banks can offer higher interest rates because they generally have lower overhead costs than traditional banks. They do not have a physical store, thus they don’t need to spend too much on manpower, lease, and equipment. All the amount they saved is added to the interest rates of their depositors as part of their marketing strategy.
Protects You From Inflation
Ever wonder why it seems like you still struggle financially despite the increase in your savings, salary, or sales? There’s a big possibility that you are not aware of inflation.
As of this writing, the inflation rate of our country is at 3%. It means the prices of general goods and services have already gone up at that rate over time. There are multiple ways to look at this. But for the sake of simplicity, this information also means we are losing 3% of our savings annually. It’s an invisible expense that eats our hard-earned money every year.
Here’s how our family’s savings will look over time due to inflation:
Unfortunately, there’s nothing we can do about inflation as a whole. It is a guarantee that the cost of living next year will be more expensive than today. What’s good is there’s something we can do about it on a personal level. One way to protect our savings is to keep them in an account with an interest rate equal to or higher than the inflation rate.
Here’s what our savings will look like when kept in accounts that give at least 3% interest rate per year:
Maintains Your Liquidity
One underrated perk digital banks offer is they don’t require lock-in periods, minimum deposits, or a maintaining balance. I’m sure you’ll understand the importance of this feature when you have an emergency fund. Besides higher interest rates, digital banks also enable you to stay flexible in times of need.
So far, no other financial institution can offer this type of service. The table below in a way summarizes what most banks offer: higher sum + longer duration = higher interest rate.
Sadly, most people aren’t liquid enough to pay for their emergency expenses. A good majority often rely on their credit cards, which would eventually lead them into debt. I know because my wife and I have been there. It took us a couple of years to pay off eight credit cards.
Your Money Is Insured
Another notable attribute of digital banks is that deposits are insured. If a bank closes, the Philippine Deposit Insurance Corporation (PDIC) will cover up to Php 500,000 of your total deposits. There are many digital banks popping up here and there lately. Sign up with financial institutions licensed by the central bank and covered by deposit insurance.
Watch Out For The Transaction Fees
Most, if not all digital banks are now starting to charge transaction fees. They charge a small amount for every transfer, deposit, or payment you make. It’s wise to be mindful of your transactions to avoid overspending on those surcharges. It will be pointless to earn good interest, only to spend them on transaction fees.
Enjoy It While It Lasts
Digital banks are businesses, at the end of the day. They are here to make money. But based on a report, not all digital banks are profitable. All of them are still operating at a loss and see themselves getting returns in 5 to 7 years. Of course, it’s not a guarantee. Will digital banks be successful in the future? Can they sustain the high interest rates they currently offer? No one can tell for sure. But for us, consumers, it’s our job to enjoy the benefits of their services while it lasts.
Personal Use Cases
Here are two ways I use digital banks for my family’s savings:
- For emergency.
It’s smart for every family to prepare for life’s unpredictability. One way to do this is to set aside a sum that can cover six months to one year of our living expenses. The money allocated for this purpose is called an emergency fund.
I used this allocation to fix my car when it broke down last December. Saving in a digital bank made it easier to access money for repairs.
Before the existence of digital banks, I used to place our emergency fund in the money market. It earns good interest, but would take a few days to withdraw.
- To build a nest egg.
We recently went on a one-week family vacation in Osaka. It took us two years to save up for that trip. In 2021, my wife and I committed to set aside a portion of our income to our digital account each month. The interest we earned during the entire duration covered half of our food budget in Japan. It’s something we wouldn’t accomplish had we built our travel fund in a regular savings account.
Nest egg is a term used to describe the amount of money kept for a specific purpose. It could be for investing, home repair, car, or, in our case, travel.
Final Thoughts
The benefits of keeping our family’s savings in digital banks are too good to pass up. It’s the only financial medium where you can enjoy growth and flexibility at the same time. The only concern thus far is whether they can sustain this offer long term. As for me, I’ll take advantage of the service for as long as possible.
